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3 Ways to Keep Your Portfolio Safe During Tariff Volatility
Tariff volatility continues to rattle the stock market with the major indexes swinging several percentage points in recent sessions.
The S&P 500(SNPINDEX: ^GSPC) and Nasdaq Composite(NASDAQINDEX: ^IXIC) both fell into bear market territory (a drawdown of at least 20% from a recent high) only to bounce out of it days later after President Trump reversed course with many of his tariffs.
This volatility can be challenging to handle, but there are ways to prevail. Here are some ideas to consider now.
Image source: Getty Images.
1. Resist the need to take action
It's human nature to want to take action in response to a threat. And seeing a portfolio's balance plunge as equity prices flash red can feel like a threat to your financial stability.
As counterintuitive as it may seem, the best course of action when faced with market volatility can be to do nothing. In other words, avoid a fight (trading your way out of a bad situation) or flight (selling and running for the exits) response.
Your portfolio reflects the amalgamation of past decisions. When volatility is running high, it can be helpful to pause and reflect on why you bought a stock in the first place. The stock price may have fallen in the last week in lockstep with the broader market, but that price action likely has nothing to do with the long-term investment thesis.
2. Remember the end goal
Long-term investing starts with the understanding that you should be buying a stock based on where it will be several years from now, not where it is today. The current stock market sell-off is a response to changing near-term forecasts. Many analyst targets had the S&P 500 closing higher on the year, but those gains seem unlikely if tariffs throw a wrench in supply chains and profits.
So, short-term investors and Wall Street firms may slash forecasts and overreact to near-term projections.
At times like this, I find it helpful to lean on a lesson I learned from The Psychology of Money, written by Morgan Housel. In the book, Housel describes the stock market as a field upon which many games are simultaneously being played. You have short-term traders and long-term investors; institutions and retail investors.
The point is that not every dollar invested in a stock has the same motive. Folks who ride a stock higher to make a quick buck may be the same ones who dump the stock the second there's an inkling of newfound risk. Meanwhile, folks who have been in stock for several years or decades are less likely to have a knee-jerk reaction to any single piece of news.
Over the long term, a stock price moves based on fundamentals, but in the near term, it can merely reflect changes in sentiment by speculative traders rather than investors. Accepting that different games are being played on the field and how they all feed into a stock's price at any given time can help you filter out the noise and understand that sometimes, price action has little to do with the long-term returns a company can offer.
3. Simplicity is not your enemy
Outside-the-box thinking can lead to finding hidden gem companies at a great value. But there's no extra credit in the stock market for coming up with a brilliant idea no one has ever thought of. In fact, sometimes, the best ideas are hiding in plain sight.
Well-run, financially sound companies like Apple(NASDAQ: AAPL) and Nvidia (NASDAQ: NVDA) have seen their share prices plummet. Both stocks are down over 15% year to date as of this writing. It may seem too obvious to buy shares of two of the most valuable companies in the world on sale, but there's no need to discount an investment idea just because it is simple.
Apple has been crushed because of its dependence on China. While international exposure is normally an advantage because it adds diversification, tariffs would make it a weakness because Apple's supply chain depends on manufacturing in Asian countries like China, India, Japan, South Korea, Taiwan, and Vietnam. In the four trading sessions following President Trump's tariff announcement, Apple stock fell a staggering 23% as investors faced the grim reality that Apple's margins could tumble if costs increase due to tariffs.
Nvidia is in a league of its own when it comes to technological prowess in designing graphics processing units for artificial intelligence (AI) applications. However, Nvidia depends on its biggest customers -- companies like Amazon, Microsoft, Alphabet, Meta Platforms, and Apple -- to spend big bucks on AI. An economic slowdown or recession could lead to a pullback in capital spending from these key customers, leading to a slowdown in growth. What's more, tariffs could increase Nvidia's costs and further compress margins.
If tariffs stick around, the near-term outlook for companies like Apple and Nvidia will be undeniably weaker than it was just a few weeks ago. But both companies have incredibly strong balance sheets, industry-leading products, high margins, and experienced leadership -- they should be able to adjust and deliver profits even if tariffs persist.
Apple and Nvidia are two of the biggest names in the stock market and popular picks for any investor. And amid the current uncertainty, they're also excellent examples of beaten-down growth stocks that are even more attractive buys now.
Stay the course
In the moment, it's easy to get swept away by narratives that make it seem like the entire market is in dire straits. But oftentimes, swings in stock prices can be disconnected from a company's true value.
The pandemic was an excellent example of why a company's value shouldn't necessarily change just because a few quarters of earnings are down, especially if the business has the means to endure an economic slowdown.
Volatility is the price of admission for unlocking the power of compounding wealth in the stock market, so staying even-keeled during times like this is paramount.
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